…..Stocks bounce back. A 3 month deal on debt ceiling. Highest taxes? Nope. Fischer resigns from Fed. Beige Book moderation. Trade deficit up. Service sector solid. Irma on the way. Closing the Gap. RH bounce. Intel win. New Leaf.
Financial Review by Sinclair Noe for 09-06-2017
DOW + 54 = 21,807
SPX + 7 = 2465
NAS + 17 = 6393
RUT + 2 = 1402
10 Y + .04 = 2.11
OIL + .55 = 49.17
GOLD – 5.90 = 1334.50
The major stock indices did what they have been doing all year – shrugged off worries and continued on the trend. In the background, the economy continues to slog along with good, not great growth. Companies continue to report good earnings. Expectations for tax reform and infrastructure spending are diminishing but on the bright side we are not engaged in a nuclear war with North Korea, so it all kind of balances out. Bank of America Merrill Lynch, for one, thinks investors should be more confident on equities. The firm said in a research note that it recommends being bullish given that the first synchronized upswing in the global economy since 2007 is a strong tailwind for earnings. By its reckoning, the firm figures that global corporate profits are running 13.5 percent higher than last year. That’s in line with the gain in the benchmark MSCI All-World Country Index, suggesting stock prices have not gotten ahead of themselves. To be sure, there are plenty of other issues on the horizon to worry about, but for now the trend is in place until something blows up.
In a rebuke to Republican leaders, Trump backed Democrats’ plan to support a deal that would fund Hurricane Harvey aid but only raise the debt ceiling for three months. Those two items would also be tied to a measure to keep the government open through the end of December, setting up a hugely complicated year end crush of must-pass items. Republicans would have preferred a longer extension to avoid another fight in December. Democrats could use the opportunity as leverage to attach a provision aimed at codifying into law the Deferred Action for Childhood Arrivals program. Nothing signed yet, but it looks like the debt ceiling crisis has been kicked down the road for now. I’m not sure we can call it bipartisanship but it’s not a debt default.
Debt ceiling jitters were particularly high Tuesday when the Treasury Department auctioned $20 billion of one-month bills at a rate of 1.30 percent, which was higher than the 1.23 percent yield on two-year Treasury notes. Those who were brave enough to buy at those rates saw the value of the bills soar today as the rate dropped to 1.02 percent.
On the stump for tax reform in North Dakota this afternoon, Trump repeated one of his favorite campaign claims: that Americans pay more in taxes than any other country. Except that’s not true. In fact, the US ranks in the middle of the pack when compared with the roughly three dozen developed countries tracked by the Paris-based Organization for Economic Cooperation and Development. And our tax rate, is ranked fourth from the bottom, among the very lowest.
Stanley Fischer, the vice chairman of the Federal Reserve, announced today that he would resign in mid-October. Fischer joined the Fed’s board in 2014 after a distinguished career as an academic economist and an international policy maker. Fischer brought a hawkish voice to Fed deliberations on monetary policy, arguing that the Fed should be raising interest rates more quickly, sparring with Janet Yellen, the Fed chair. But he provided reliable support for measures strengthening financial regulation. Trump has not been in a rush to refill the Fed’s board. There were two vacancies when he took office, and a third seat opened in the spring. So far the White House has put forward only one candidate, Randal Quarles, a Utah investor who was nominated in July. Fischer’s departure is unlikely to shift monetary policy in the near term. The Fed is widely expected to announce after its next meeting in mid-September that it will begin to reduce its holdings of Treasuries and mortgage-backed securities.
The Federal Reserve’s latest Beige Book report, which collects and presents anecdotes on economic trends from policy makers’ business contacts around the country. All 12 Fed districts reported moderate to modest economic growth. Companies aren’t passing along higher input costs to consumers in the form of more expensive products and services. Instead, they’re accepting lower profit margins. The majority of districts reported limited wage pressures and modest to moderate wage growth. The Fed said that consumer spending increased in most districts and that many contacts were becoming worried about a prolonged slowdown in the auto industry. The Beige Book, based on information collected on or before August 28, said there was not enough time to gauge the full extent of the flooding from Hurricane Harvey. The Atlanta and Dallas Fed banks reported the storm created broad disruptions to economic activity along the Gulf Coast.
Economic reports today show the trade deficit rose slightly in July, keeping the U.S. on track to post a larger gap in 2017 than in 2016. The deficit edged up to $43.7 billion in July from $43.5 billion in June.
A reading on services activity, meanwhile, came in better than expected, providing an added lift to the outlook for the health of the U.S. economy. ISM services were at 55.3 in August, compared with 53.9 in the prior period. A reading of at least 50 indicates expansion.
Hurricane Irma has hit a few islands in the Caribbean – including St. Martins and St. Thomas – and is now closing in on Puerto Rico. The imminent threat of a natural disaster comes as the territory deals with a massive economic disaster. In May the commonwealth filed the biggest municipal bankruptcy in US history. Puerto Rico has $74 billion in debt, and another $50 billion in pension obligations on the books. The Federal Emergency Management Agency already has about 400 people in Puerto Rico and the U.S. Virgin Islands to help with hurricane preparation and response. Puerto Rico will surely need and get federal assistance. A severe disaster could exacerbate some of the commonwealth’s adverse economic trends, including migration to the U.S. mainland.
The official forecast path shows that Irma’s center could track along or either side of the Florida peninsula. Where Irma turns north will be critical for determining what part of Florida experiences the most dangerous impacts from Irma. Regardless, conditions in South Florida may go downhill as soon as midday Saturday. Irma is a Category 5 and it is a very large hurricane, wider than the state of Florida; so, despite the uncertainty in its track, there is a threat of rainfall flooding and strong winds capable of triggering power outages, downing trees and perhaps some structural damage will likely occur to some degree well inland from wherever Irma makes landfall into a swath of the Southeast early next week.
And just a side note; the NFL season kicks off Thursday night but I would like to nominate J.J. Watt as the league MVP. The Houston Texan defensive player put together a fund raising effort for Hurricane Harvey relief, and he has already raised $27 million.
And while we’re at it, a tip of the hat to Oklahoma. The Sooner state has offered aid to burnt orange country. Volunteers from agencies in Oklahoma, such as the American Red Cross, Children’s Disaster Services, Convoy of Hope, Mercy Chefs, the Salvation Army, Southern Baptist Disaster Relief and Operation BBQ will be going to Texas. Just in case you’re wondering – Operation BBQ is a real thing. It started in 2011, when Joplin Missouri was hit by a tornado. Volunteers from competition BBQ teams from eight states answered the need to help feed displaced families, police, fire, National Guard and emergency personnel. They served over 120,000 meals over 13 days. Operation BBQ – you may know it by its other name: Ribs Sans Frontieres.
The Gap plans to close about 200 “underperforming” Gap and Banana Republic locations. There are currently about 2,000 Gap and Banana Republic stores worldwide, so the closures would likely impact about 10% of them. Gap declined to specify how many of each brands’ stores will close or where the soon-to-be shuttered stores are located. One bright spot for Gap has been Old Navy – its less expensive clothing brand. When Gap reported earnings last month, Old Navy outperformed the other brands once again. While comparable sales at Gap fell by 1% and Banana Republic’s sales were down 5%, Old Navy saw a 5% increase. The company added that it plans to continue making “significant” investments in its online operations, including in artificial intelligence technology. Shares of The Gap were up 7.4% today. Closing 200 stores and the stock jumps higher – no, it doesn’t make sense.
Restoration Hardware announced a forecast for third-quarter and full year adjusted earnings that flew past its previous expectations, sending its shares 30% higher in extended trading. The stock is heavily shorted and the big move looks like a short squeeze.
Intel has won a point in its antitrust battle with the European Commission — and the American technology industry as a whole may be feeling a little victorious as well. The Court of Justice of the European Union ordered a lower court on Wednesday to re-examine the 1.6 billion euro, or nearly $1.3 billion, fine imposed on Intel in 2009 for abuse of its dominant position in the computer chip market. This does not mean Intel is in the clear, just getting a second chance to present their side of the case. The decision is considered a setback for the European Union antitrust authorities who have been investigating American tech giants like Google and Qualcomm.
T-Mobile upped the mobile phone carrier war on Wednesday, announcing an exclusive partnership to offer free Netflix Inc. subscriptions to T-Mobile One family plan customers.
The best selling electric car is the Nissan Leaf, and today, Nissan announced it has updated the car for the first time since it was introduced in 2010. The biggest change – a 200 mile range.